DP can be replaced by (DP/P) * P which is the simple or geometric return multiplied by the original price.

Originally, I thought the reason that the strategy might work is that while returns move randomly over the short term, they are negatively autocorrelated over longer horizons.

Often such an indicator takes 10 months or 200 days of prices into consideration and spits out a signal.

However, we see that the returns in the recent past are weighted heavier than those in the past.

There's a tension.

On the one hand the strategy is often called a 'momentum rule', i.e. large recent movements will cause further short term movements in the same direction - think of a train building up a head of steam.

On the other hand the long lookback suggests a mean reversion component where large negative or positive returns cause an elastic snapback to a long term mean.

In my next posts I hope to explore the strategy more, and perhaps come up with a more refined rule. And who knows, maybe even more profitable (although I have been spectacularly unsuccessful with that so far!).